Builder earnings may hold hint about 2014 home prices

WASHINGTON (MarketWatch) — Prospective home buyers may want to check out builders’ earnings reports in coming days for clues about where the companies plan to construct new properties in 2014 and whether prices will head higher.

Here’s a key question: Will builders focus on markets where competition for space is high? If they do, buyers and investors can expect builders to continue to quickly raise prices, adding on to 2013’s double-digit home-price growth.

“Builders are working hard to deliver homes in communities [where] home buyers want to buy,” said Brian Jones, co-portfolio manager for the real-estate securities group at asset manager Neuberger Berman. “Builders themselves have faced some challenges in terms of access to lots in the best communities.”

A new house at Pulte Homes’ Fireside at Norterra-Skyline development in Phoenix.

“That caught a lot of builders by surprise as that demand slowed down,” said Holger Boerner, a portfolio manager and real-estate team sector leader at Fidelity Investments. “I think they have to slow down price increases.”

Hit by a rise in mortgage rates that started in May, shares of builders and related stocks underperformed the broad market for 2013, though not by a lot. The exchanged-traded funds SPDR S&P Homebuilders ETF
XHB, +0.75%
and iShares U.S. Home Construction ETF
ITB, +0.74%
rose 25% and 17%, respectively, while the S&P 500 Index
SPX, -0.23%
gained 30%.

Because of the rises in not only home prices but rates, housing became less affordable last year. Monthly loan payments for buyers of a new median-priced single-family home in November would have been about $200 greater than if the home had been purchased a year earlier (check out the second chart in this slide show). That calculation assumes a 20% down payment and a 30-year fixed-rate mortgage.

Builders may eventually slow price growth as they try to increase sales. After all, the market won’t accommodate rising prices infinitely. Home-price growth that outstrips income growth too quickly and for too long will turn off potential buyers. But enticed by demand and surging prices, builders could soon ramp up home construction in Nevada, Arizona, California and Florida, Paul Diggle, an economist at Capital Economics, wrote in a recent research note.

“The subdued level of home building in Nevada, Arizona, California and Florida is primarily a legacy of the glut of cheap, distressed homes [that] flooded the market during the recession and crowded out home builders,” Diggle wrote. “Now that this inventory is being worked through, we think that home building will enjoy a resurgence in these states.”

‘Cautiously optimistic’ on 2014 home sales

Faced with uncertain economic growth and rising mortgage rates, the publicly traded builders may be reticent about future guidance when reporting end-of-year results. Phrases such as “cautiously optimistic” are likely to trip off many a home-building executive’s tongue.

Looking at results for the end of 2013, mortgage rates remained low enough that analysts expect builders to report strong sales and income growth. Fort Worth, Texas–based D.R. Horton
DHI, +0.75%
the country’s largest residential builder, is scheduled to report first-fiscal-quarter results on Tuesday, and analysts expect per-share income of 29 cents, up from 20 cents a year earlier, with revenue climbing to $1.47 billion from $1.28 billion, according to FactSet. PulteGroup
PHM, +1.57%
a major builder based in Bloomfield Hills, Mich., is set to report fourth-quarter results on Jan. 30, and analysts expect per-share income of 45 cents, up from 15 cents in the year-earlier period, with revenue climbing to $1.68 billion from $1.57 billion.

For 2014, if jobs growth is strong enough, a chunk of the housing demand that built up over the recession could be unleashed, even in the face of rising rates. Last year saw the start of more construction on new homes than any other year in the past six.

“Broadly speaking we expect a continuation of improving fundamentals within the home-building space,” Jones said.

But first-time buyers may remain a relatively low share of the buyer pool this year, with many young adults not ready to give up their parents’ sofabed just yet.

“There really haven’t been the higher-quality, higher-pay jobs that would really drive strong personal-income growth, which probably puts a little bit of a headwind against the industry,” said Peter Martin, an analyst at JMP Securities, a San Francisco–based investment bank.

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